How Many Points Does A Hard Inquiry Affect Credit Score?

How Does a Hard Credit Inquiry Impact Your Credit Score?

Whenever an individual applies for any credit, including a credit card, personal loan, auto loan, or mortgage, the credit will pull the credit report to check the credit standing of the applicant. Hard inquiries, also referred to as hard credit checks, do affect your credit rating; especially when you have multiple inquiries within a short duration. But how much of an impact does a hard inquiry have on your credit score? Here are the possible consequences and some ways how you can avoid it.

What is a Hard Credit Pull?

A hard inquiry on the credit report is when a credit provider pulls your credit report to decide on a loan application that you have made to him or her. This enables them to assess your credit records, and income status among other details to decide whether to accord you favorable credit terms in case they grant you credit.

They must be distinguished from soft inquiries, which are background checks by creditors or employers or which you conduct on yourself and which have no bearing on your credit score. Soft inquiries also include credit checks made by lenders before approving loans and promotional inquiries. Any time you check your credit report this is considered as a soft inquiry.

The Effect on Credit Score: This is a short-term effect as it only affects the credit score of individuals who have borrowed and those who have been lent the money.

It is important to note that most credit scoring models allow rate shopping, implying that your score will not drop significantly because of multiple automobile, mortgage, or student loan applications within a short span. This makes it possible to compare the various available rates without any adverse effects on your credit pull. Nevertheless, numerous hard inquiries related to other kinds of consumer credit may indicate higher risk to certain lenders.

FICO clearly states that a hard inquiry can reduce your score by as much as five points per inquiry made. Nonetheless, those clients with good credit status may see their score reduced by as much as two points per hard inquiry. Consumers with fair or bad credit scores are likely to be more affected by each hard credit check.

The impact of a hard inquiry on your credit score also depends on other factors.

The number of recent inquiries: The impact is reduced with fewer inquiries.
Time since the inquiry: The effect is smaller with time.
The length of your credit history: The negative effects of inquiries are minimized if an individual has a long, favorable credit history.
How many current open accounts do you have: Having more accounts may negatively impact your score.
Your overall credit utilization rate: What this means is that if your rates are high then you are likely to have a low score.

Typically, if you have any loan or credit application, you will experience a small dip in your credit score, depending on the number of hard inquiries. It is much less severe than the late payments or high balances which affect your score more.

How Long Inquiries Affect Your Credit?

While the impact of hard credit inquiries is felt in the short run, its influence gradually decreases and is eliminated from the credit report. Here is how long they stick around.

Equifax - stays on your credit report for 2 years.
Experian - Stays on your credit file for two years.
TransUnion - remains on your report for 25 months.

For scoring purposes, a list of the more recent inquiries is more important. Most of the time, inquiries older than 12 months do not affect your score. To this extent, FICO reckons that any inquiry older than 24 months has no bearing on your score at all.

Too Many Credit Inquiries

As we have seen, inquiries from rate shopping are not likely to cause significant harm to your credit score, but having too many of them will be interpreted as a higher risk by lenders and credit bureaus. This is particularly the case if you have recently applied for several credit accounts with the same credit reporting bureau.

Some recommendations for how many hard inquiries are too many include.

Applying for 3 credit cards within 6 months
Five auto, mortgage, or student loan inquiries in the last 30 days
Any purpose SEVEN inquiries in the 12 months

However, if you have to apply for several new credit accounts to make large purchases such as funding college fees or purchasing investment real estate, it is advisable to compare different companies and apply for credit within one month. This amasses the questions in one shopping session instead of having to make multiple shopping trips within a year or months. Rate shopping is beneficial, whereas applying credit frequently is not.

How to Lessen the Effects of Hard Inquiries?

Here are some tips for minimizing how much a hard credit check hurts your credit score.

Only apply for the credit you need: Each credit inquiry lowers your score, therefore, do not apply for accounts recklessly.
Space out applications: There should be at least six months of waiting before applying for more available credit again. setup
Ask about preapprovals: Preapproval checks that involve soft inquiries will not lower your credit score.
Raise your credit limits: Lower proportional balances are also beneficial in reducing the effects of inquiry.
Pay down balances: Another benefit of using the credit limit is that it also helps to offset any score drops that may occur.
Wait 12-24 months: Older inquiries are less impactful as they are removed after some time or do not affect your score greatly.

Most individual hard inquiries have a small score penalty. However, many in a short period are usually considered as increasing the risk and thus reducing credit scores more significantly. Applying for credit, which is not needed or could be avoided is one of the ways that have negative impacts on your score, hence, you should only apply for credit when necessary.

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